Tuesday, June 15, 2004

'Naked DSL' - much more important than many realise

"Naked DSL" - much more important than many realise

Jan Dawson, Principal Analyst

The revelation by US ILEC Verizon that it has been offering so-called 'naked DSL' - or standalone DSL - to customers in some markets follows an announcement by fellow ILEC Qwest Communications in February that it would offer the service. In both cases, this has been a response to customer demand, and has been low key so far. However, offering naked DSL services has the potential to seriously dent incumbents' revenues - and not just in the US.

The phrase 'naked DSL' is used to refer to the situation where DSL is provided to an end user without a PSTN voice service running over the same copper wire. Both Verizon and Qwest have begun offering it because customers resent having to pay for a voice line they don't need just in order to have DSL service. Cable operators providing broadband, by contrast, make no such requirement, and it is precisely to fend off this threat that Verizon and Qwest are quietly acceding to their customers' requests.

So far, these services have tended to be provided at a slightly higher charge. Qwest, which publishes its prices for naked DSL on its website, charges $5 per month more for naked DSL than for DSL provided on a line which also has voice service running over it. This $5 charge helps to cover the shared costs for the maintenance of the local loop which would normally be covered through voice line rental charges.

However, although naked DSL is primarily offered as a defensive strategy, it could have nasty knock-on effects on other aspects of incumbents' businesses. Many customers see mobile for voice and DSL for Internet access as the ideal combination, but are forced to maintain both a fixed and a mobile voice subscription in order to receive DSL service. Once this barrier is broken down, we could see rapid abandonment of the PSTN voice line in favour of mobile.

The other hit incumbents will take is from voice over IP. Once users are convinced that VoIP offers a carrier-grade service, they will be able to drop their PSTN lines and use VoIP for their calls from home and office and mobile for their calls outside the home. The combined threat of line losses to mobile and VoIP explains the reluctance of ILECs to make more noise about their naked DSL services.

Anecdotal evidence suggests there is considerable pent-up demand for naked DSL - online DSL user groups abound with messages from disgruntled customers bemoaning their inability to drop their PSTN lines. Now that the news has got out, many of these customers could rush to drop their PSTN voice lines in favour of, say, Vonage.

Things could get even worse if regulators intervened to enforce the provision of naked DSL. The current situation must be one of only very few where regulators are willing to permit "over-bundling" - users being forced to pay for a service they don't want in order to receive a service they do want. How long will it be before a proactive regulator steps in and forces an incumbent to provide naked DSL? I'd give you good odds that at least one will do it within the next 12-18 months.

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